Fed Launches Historic Stimulus Measures to Stem Crisis

A new round of quantitative easing and a pledge to back the bond market.

  • The Fed announced more QE measures and corporate bond buying
  • Fed reinstates the TALF from 2008-09 to lend to troubled businesses
  • Some Fed governors predict unemployment to skyrocket in 2nd quarter

The Federal Reserve announced "all-in" monetary policy measures this morning, signaling it would provide whatever funding is needed to prevent what is turning into a liquidity crunch for many public companies and small businesses across the country into a fill blown crisis.

In a statement released 90 minutes before U.S. markets opened, the Fed said, “It has become clear that our economy will face severe disruptions... Aggressive efforts must be taken across the public and private sectors to limit the losses to jobs and incomes and to promote a swift recovery once the disruptions abate.”

Federal Reserve pledges unlimited monetary policy support to combat crisis

The Fed announced a new round of quantitative easing measures in addition to new landing facilities to help investment grade companies avoid layoffs and bankruptcies.

Among the actions announced Monday, the Fed said that the purchases of Treasury and mortgage securities that it began one week ago are effectively unlimited. It also pledged to purchase $375 billion in Treasury securities and $250 billion in mortgage securities this week, eclipsing the $600 billion worth of government securities it purchased during as part of the quantitative easing measures it used during the financial crisis of 2008-09.

The Fed also said it would launch three new lending facilities, including the crisis-era Term Asset-Backed Securities Lending Facility, or TALF to support consumer and business credit markets. As it did in 2008, the Fed will lend money to investors to buy securities backed by credit-card loans and other consumer debt.

The moves come as the U.S. Congress is still at an impasse over a $1.3 trillion stimulus package aimed at helping small businesses, individuals facing layoffs, and industries hard hit by the coronavirus slowdown. The U.S. economy is likely in a recession already and forecasts for a rise in unemployment by economists and Fed officials portend to a steepening crisis.

The U.S. unemployment rate could reach 30% in the second quarter, according to Federal Reserve Bank of St. Louis President James Bullard. 

This is three times what we saw during the 2008-09 financial crisis.The chart below shows the monthly, seasonally adjusted unemployment rate since 1948 with the grey areas representing recessions. During this period, the highest jobless rate was 10.8% at the end of 1982. We have to go further back to the Great Depression to find anything close to what Bullard is predicting. The unemployment rate hit 24.9% in 1933. 

unemployment rate
 Federal Reserve Bank of St Louis

Bullard expects lost income to reach $2.5 trillion and GDP to fall by 50%. "This is a planned, organized partial shutdown of the U.S. economy in the second quarter," Bullard told reporters, stressing the need for massive fiscal and monetary measures.  

He remains optimistic that the economy can be saved if the U.S. government replaces each lost dollar and proposes seeing this as a massive investment in U.S. public health rather than bailouts during a recession. 

"The overall goal is to keep everyone, households and businesses, whole with government support," he said. "We are not trying to move production and income up in the second quarter. We are trying to keep it out of the second quarter. You want capital to just sit in place. Switch off the factory. Then switch it back on."

Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, appeared on CBS's 60 Minutes and said unemployment insurance claims, which increased by 70,000 and reached 280,000 for the week ended March 14, could "be five times that amount next week. Maybe more." Goldman Sachs says it will reach 2.25 million.

"Millions of people are gonna lose their jobs. And that's what's so scary about this," he said. Kashkari predicts the U.S. will soon be in a recession, if it isn't already, and suggested "forgivable loans" for small businesses. These are loans that the government will forgive after a few years on the condition that employers retain their workers.

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  1. https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200323a.htm

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